Pensions
We’re all living longer, more active lives. Surely, worse than
being afraid of dying too young must be the fear of living too
long!
So, what should you do about planning for retirement and why is
it so important to plan?
Britain has an ageing population and we all can expect to live
longer than our forefathers.
The number of babies born each year remains constant whilst
there are more and more pensioners relying on a smaller and
smaller workforce to fund their State pensions. The single
persons’ current basic State pension is just £90.70 a week (2008-09
figures), and
that figure is set to fall in value compared to earnings in
coming years. On top of this there will be less and less State
pension money available to go around.
It is vital that we all make extra provision for our retirement
through some form of savings vehicle. To encourage people to
save for retirement, the Government allows very generous tax
breaks on pension contributions. Basic rate taxpayers receive
tax relief at 20% and higher rate taxpayers can receive relief
at up to 40% (although higher rate taxpayers will not
necessarily get 40% relief on single contributions). It makes sense to take advantage of a pension, one of the
most tax-efficient ways of investing you will ever find. If you
have an existing personal pension, when was the last time you
had a Personal
Pension Review?
The worst thing about pensions is their name. It conjures up all
the wrong pictures. Instead, think of it as something that will
pay you for not working later.
Personal Accounts
From 2012, all employers must offer a quality private scheme or
subscribe to a Government backed
Personal Account. Follow the link to our sister site for
full information.
What type of
pension scheme should I invest in now?
If you are employed and your employer runs a company pension
scheme it almost always makes sense to join it especially if
your employer makes contributions in addition to your own. If
your employer does not offer a company pension scheme, or if you
are self-employed, you should consider a Stakeholder or
personal pension plan.
If you are employed, you may be able to persuade your employer
to make contributions too.
You can contribute to as many Stakeholder or Personal Pension
plans as you like as long as you do not exceed the maximum
levels for contributions set by the Inland Revenue.
From April 6th 2006 a new ‘simplified’ set of rules was applied
to all UK pension arrangements. This swept away the eight existing tax regimes for pensions and
replaced these with just one set of rules. Individuals are given greater choice and flexibility in when and how they save
for their retirement. The intention of pension simplification was
to remove complex calculations on what can be paid into a
pension and what can be paid out at retirement. Following A-Day,
whatever type of pension arrangement is concerned, individuals
(and Employers) will be able to pay up to the Annual Allowance
for that tax year (£235,000 for 2008-09), with an overall limit
– the Lifetime Allowance (£1.65 million for 2008-09) for their
total pension provision.
Within these limits full tax relief is available. For the few
individuals where contributions made or funds are valued over
these limits, they will either get no tax relief or will suffer
a tax charge. The new rules allow for up to 25% of the pension
fund to be taken as a Pension Commencement Lump Sum (PCLS) and
this is currently tax-free, regardless of the type
of pension. It may be relevant that this used to be called the
"Tax Free Lump Sum". It is a matter for speculation as to
whether or not his heralds a change to the tax status of this
initial amount in the future.
Protection is available for existing pension schemes
which exceed, or are likely to exceed these limits, but the
schemes will need to be registered. There are many choices to be
made by those who have existing pensions and for those
considering how to start saving for retirement. Again, the
issues are complex.
Stakeholder pensions were introduced in April 2001 to encourage
those on lower incomes to make private provision for their
retirement. They are generally available to anyone based in the
UK. Stakeholder pensions are available for both employed and
self employed people. For the first time, those without earned
income, including children (or someone on their behalf!) are able to save into a pension plan.
Most employers are obliged
by law to offer a Stakeholder pension scheme to employees
unless they already offer a pension scheme which meets certain
standards.
The aim was that Stakeholder pensions will be straightforward,
low-cost, flexible and transparent. The rules state that pension
providers cannot charge plan holders more than 1.5% for the
first ten years, then 1% in subsequent years.
Unfortunately, the very people that these plans were designed to
help have been less than eager to participate and the more
affluent have been quick to use them as very efficient tax
planning tools to provide pensions for grandchildren!

How much should
you contribute?
This depends on your age; be realistic. If you pay £50 a month
into a pension, then do you really think it will provide an
income of £20,000 a year when you retire? The arithmetic just
isn’t there! The most important thing is for you to increase
your contributions as your earnings increase. If you wish to maximise your occupational
pension scheme benefits you can do so by contributing to an
Additional Voluntary Contribution (AVC) scheme run by your
employer or a Personal Pension plan. The maximum contribution
that can be paid to all schemes is your annual earnings, up to
the £235,000 cap.
What income can
I look forward to?
From a traditional occupational final salary scheme, also known
as ‘defined
benefit’, the amount of income you can expect each year is
worked out using a set formula. The company might pay you, say,
1/60th of your final pay for every year you have worked there.
For example, if you have worked for 25 years and your final
salary is £25,000, you will receive 25/60ths of £25,000, which
is £10,417 a year.
If you are in an occupational money purchase scheme, also known
as ‘defined
contribution’, your contributions and those made by your
employer on your behalf are invested in funds, usually linked to
the stock market. The return on your investment depends mainly
on the performance and the type of funds you have chosen to
invest in. The same applies with Stakeholder and Personal
Pension plans. As with any long term investment, the value of
funds can go down as well as up and past performance is no
indication of future performance.
The Pensions Service have developed a guide and you can access
it by following this
link
Which is the
right choice for me?
If your employer offers a company scheme which they pay into on
your behalf, in most cases you should join it. Otherwise a
Stakeholder or a personal pension plan is a sensible method of
funding for retirement as these schemes will give you choices to
match your preferences. You can also set up different
types of pension plans should you want to, which was not allowed
pre April 2006.
The sooner you get started making realistic pension
contributions, the more comfortable your retirement is likely to
be. The pension’s world remains complex and baffling for many
consumers. Choosing the right pension provider, the most appropriate funds and agreeing an affordable level of contributions can be
difficult to decide by yourself. Under the simplified pension
regime from 6th April 2006 (A-Day), the limits to all pension
arrangements in terms of what can be paid in and taken out have
changed completely. We will be able
to tell you whether and how these changes impact on you and if you
need to take any action to protect your
pension provision.
What if I
already have a Personal Pension Plan?
A pension plan is an investment like any other, just with
different tax breaks and conditions. Many people still have
funds with providers that are now closed for new business and
are paying charges way in excess of the Stakeholder standard
and/or are in poorly performing funds or closed
with profit
funds which are paying virtually no bonus at all. Our section on
With Profit Bonds gives some background to this problem.
Independent advice is essential here as a specialist can analyse
your charges and funds and make recommendations for you to move
your funds - often at no cost at all to yourself.

When must I take my benefits and how will they be paid?
Prior to Pension Simplification, an annuity had to be bought at
the age of 75. This no longer applies, although for most people
with modest pension pots and annuity remains the best choice.
Alternatives are to leave the fund invested and take what is
known as "Unsecured Pension" (USP). You can take up to 25% of the fund
as tax free cash at the same time.
The USP upper limit is worked out using tables of income
drawdown rates provided by the Government Actuary's Department
(GAD). The starting point is to work out the basis amount by
multiplying the USP fund by the applicable rate from the GAD
table (based on the pensioner's age and gender and the current
gilt yield).
-
The highest yearly income allowed is 120% of the basis
amount.
-
The lowest yearly income allowed is nil - that is, there is
no need to actually receive any income, it is taken at the
rate of £0.
Income can be changed each year within these upper and lower
limits.
At 75, you can continue to
take what is known as an "Alternatively Secured Pension"
(ASP),
although the limits as to how much can be taken are not as
generous. On death, the value of the fund may be returned to
your estate, less a tax charge, or the surviving spouse may buy
an annuity.
The ASP upper limit is again worked out using tables of income
drawdown rates provided by the Government Actuary's Department
(GAD). The starting point is to work out the basis amount by
multiplying the ASP fund by the applicable rate for a pensioner
aged 75 from the GAD table (based on the pensioner's gender and
the current gilt yield).
-
The highest yearly income allowed is 90% of the basis
amount.
-
The lowest yearly income allowed is 55%of the basis amount.
-
If unrealised funds pass to your estate, in addition to the
potential of
Inheritance Tax, a tax charge of up to 82% will be levied
Income can be changed each year within these upper and lower
limits.
The great danger here is that more may be taken in income than
the investment performance can sustain and you could literally
outlive your pension fund. The option of leaving the money
invested is therefore usually only recommended for funds
>£100,000 and where the client has alternative income producing
assets.
Taking Benefits Early
Every year one delays taking a pension may well mean that the
fund continues to grow, but we can never, ever, live that year
again and benefit from the income lost. For many people, taking
benefits early makes good sense and we have developed a
calculator to illustrate how this could affect you. If you would
like us to discuss this with you, please
contact us after having a look at
the concept on our early retirement
page
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